Chapter 10: Software in Flux: Partly Cloudy and Sometimes Free

10.1 Introduction

For many, software has been a magnificent business. It is the two-hundred-billion-dollar-per-year juggernautD. Kirkpatrick, “How the Open Source World Plans to Smack Down Microsoft and Oracle, and…,” Fortune, February 23, 2004. that placed Microsoft’s Bill Gates and Oracle’s Larry Ellison among the wealthiest people in the world. Once a successful software product has been written, the economics for a category-leading offering are among the best you’ll find in any industry. Unlike physical products assembled from raw materials, the marginal costThe cost of producing one more unit of a product. to produce an additional copy of a software product is effectively zero. Just duplicate, no additional input required. That quality leads to businesses that can gush cash. Microsoft generates one and a half billion dollars a month from Windows and Office alone.F. Vogelstein, “Rebuilding Microsoft,” Wired, October 2006. Network effects and switching cost can also offer a leading software firm a degree of customer preference and lock in that can establish a firm as a standard, and in many cases creates winner-take-all (or at least winner-take-most) markets.

But as great as the business has been, the fundamental model powering the software industry is under assault. Open source software (OSS)Software that is free and where anyone can look at and potentially modify the code. offerings—free alternatives where anyone can look at and potentially modify a program’s code—pose a direct challenge to the assets and advantages cultivated by market leaders. Giants shudder—“How can we compete with free,” while others wonder, “How can we make money and fuel innovation on free?” And if free software wasn’t enough of a shock, the way firms and users think about software is also changing. A set of services referred to as cloud computingReplacing computing resources—either an organization’s or individual’s hardware or software—with services provided over the Internet. is making it more common for a firm to move software out of its own IS shop so that it is run on someone else’s hardware. In one variant of this approach known as software as a service (SaaS)A form of cloud computing where a firm subscribes to a third-party software and receives a service that is delivered online., users access a vendor’s software over the Internet, usually by simply starting up a Web browser. With SaaS, you don’t need to own the program or install it on your own computer. Hardware clouds can let firms take their software and run it on someone else’s hardware—freeing them from the burden of buying, managing, and maintaining the physical computing that programs need. Another software technology called virtualizationA type of software that allows a single computer (or cluster of connected computers) to function as if it were several different computers, each running its own operating system and software. Virtualization software underpins most cloud computing efforts, and can make computing more efficient, cost-effective, and scalable. can make a single computer behave like many separate machines. This function helps consolidate computing resources and creates additional savings and efficiencies.

These transitions are important. They mean that smaller firms have access to the kinds of burly, sophisticated computing power than only giants had access to in the past. Start-ups can scale quickly and get up and running with less investment capital. Existing firms can leverage these technologies to reduce costs. Got tech firms in your investment portfolio? Understanding what’s at work here can inform decisions you make on which stocks to buy or sell. If you make tech decisions for your firm or make recommendations for others, these trends may point to which firms have strong growth and sustainability ahead, or which may be facing troubled times.

10.2 Open Source

Who would have thought a twenty-one-year-old from Finland could start a revolution that continues to threaten the Microsoft Windows empire? But Linus Torvalds did just that. During a marathon six-month coding session, Torvalds created the first version of LinuxD. Diamond, “The Good-Hearted Wizard—Linus Torvalds,” Virtual Finland, January 2008. marshalling open source revolutionaries like no one before him. Instead of selling his operating system, Torvalds gave it away. Now morphed and modified into scores of versions by hundreds of programmers, LinuxAn open source software operating system. can be found just about everywhere, and most folks credit Linux as being the most significant product in the OSS arsenal. Today Linux powers everything from cell phones to stock exchanges, set top boxes to supercomputers. You’ll find the OS on 30 percent of the servers in corporate America,Sarah Lacy, “Open Warfare in Open Source,” BusinessWeek, August 21, 2006. and supporting most Web servers (including those at Google, Amazon, and Facebook). Linux forms the core of the TiVo operating system, it underpins Google’s Android and Chrome OS offerings, and it has even gone interplanetary. Linux has been used to power the Phoenix Lander and to control the Spirit and Opportunity Mars rovers.J. Brockmeier, “NASA Using Linux,” Unix Review, March 2004; and S. Barrett, “Linux on Mars,” Science News, Space News, Technology News, June 6, 2008. Yes, Linux is even on Mars!

Open source software (OSS) is often described as free. While most OSS can be downloaded for free over the Internet, it’s also “free” as in liberated. The source code for OSS products is openly shared. Anyone can look at the source code, change it, and even redistribute it, provided the modified software continues to remain open and free.A list of criteria defining open source software can be found at the Open Source Initiative at http://opensource.org/osr. This openness is in stark contrast to the practice of conventional software firms, who treat their intellectual property as closely guarded secrets, and who almost never provide the source code for their commercial software products. At times, many software industry execs have been downright hostile toward OSS. The former President of SAP once referred to the open source movement as “socialism,” while Microsoft’s Steve Balmer has called Linux a “cancer.”J. Fortt, “Why Larry Loves Linux (and He’s Not Alone),” Fortune, December 19, 2007.

But while execs at some firms see OSS as a threat undermining the lifeblood of their economic model, other big-name technology companies are now solidly behind the open source movement. The old notion of open source being fueled on the contributions of loners tooling away for the glory of contributing to better code is now largely inaccurate. The vast majority of people who work on efforts like Linux are now paid to do so by commercially motivated employers.D. Woods, “The Commercial Bear Hug of Open Source,” Forbes, August 18, 2008. Nearly every major hardware firm has paid staff contributing to open source projects, and most firms also work together to fund foundations that set standards and coordinate the release of product revisions and improvements. Such coordination is critical—helping, for example, to ensure that various versions of Linux work alike. Sun Microsystems claims to have eleven thousand engineers contributing to OSS.C. Preimesberger, “Sun’s ‘Open’-Door Policy,” eWeek, April 21, 2008. Guido van Rossum, the inventor of the open source Python programming language, works for Google where he continues to coordinate development. IBM programmers work on several open source projects, including Linux. The firm has even deeded a commercially developed programming tool (including an IDE) to the Eclipse foundation, where it’s now embraced and supported by dozens of firms.

10.3 Why Open Source?

There are many reasons why firms choose open source products over commercial alternatives:

Cost—Free alternatives to costly commercial code can be a tremendous motivator, particularly since conventional software often requires customers to pay for every copy used and to pay more for software that runs on increasingly powerful hardware. Big Lots stores lowered costs by as much as $10 million by finding viable OSSM. Castelluccio, “Enterprise Open Source Adoption,” Strategic Finance, November 2008. to serve their system needs. Online broker E*TRADE estimates that its switch to open source helped save over $13 million a year.R. King, “Cost-Conscious Companies Turn to Open-Source Software,” BusinessWeek, December 1, 2008. And Amazon claimed in SEC filings that the switch to open source was a key contributor to nearly $20 million in tech savings.S. Shankland, M. Kane, and R. Lemos, “How Linux Saved Amazon Millions,” CNET, October 30, 2001. Firms like TiVo, which use OSS in their own products, eliminate a cost spent either developing their own operating system or licensing similar software from a vendor like Microsoft.

Reliability—There’s a saying in the open source community, “Given enough eyeballs, all bugs are shallow.”E. Raymond, The Cathedral and the Bazaar: Musings on Linux and Open Source by an Accidental Revolutionary (Sebastopol, CA: O’Reilly, 1999). What this means is that the more people who look at a program’s code, the greater the likelihood that an error will be caught and corrected. The open source community harnesses the power of legions of geeks who are constantly trawling OSS products, looking to squash bugs and improve product quality. And studies have shown that the quality of popular OSS products outperforms proprietary commercial competitors.J. Ljungberg, “Open Source Movements as a Model for Organizing,” European Journal of Information Systems 9, no. 4 (December 2000): 208–16. In one study, Carnegie Mellon University’s Cylab estimated the quality of Linux code to be less buggy than commercial alternatives by a factor of two hundred!M. Castelluccio, “Enterprise Open Source Adoption,” Strategic Finance, November 2008.

Security—OSS advocates also argue that by allowing “many eyes” to examine the code, the security vulnerabilities of open source products come to light more quickly and can be addressed with greater speed and reliability.D. Wheeler, Secure Programming for Linux and Unix, 2003, http://www.dwheeler.com/secure-programs/Secure-Programs-HOWTO/index.html. High profile hacking contests have frequently demonstrated the strength of OSS products. In one well-publicized 2008 event, laptops running Windows and Macintosh were both hacked (the latter in just two minutes), while a laptop running Linux remained uncompromised.R. McMillan, “Gone in Two Minutes,” InfoWorld, March 27, 2008. Government agencies and the military often appreciate the opportunity to scrutinize open source efforts to verify system integrity (a particularly sensitive issue among foreign governments leery of legislation like the USA PATRIOT Act of 2001).S. Lohr, “Microsoft to Give Governments Access to Code,” New York Times, January 15, 2003. Many OSS vendors offer security focusedAlso known as “hardened.” Term used to describe technology products that contain particularly strong security features. (sometimes called hardened) versions of their products. These can include systems that monitor the integrity of an OSS distribution, checking file size and other indicators to be sure that code has not been modified and redistributed by bad guys who’ve added a back door, malicious routines, or other vulnerabilities.

Scalability—Many major OSS efforts can run on everything from cheap commodity hardware to high-end supercomputing. ScalabilityAbility to either handle increasing workloads or to be easily expanded to manage workload increases. In a software context, systems that aren’t scalable often require significant rewrites or the purchase or development of entirely new systems. allows a firm to scale from start-up to blue chip without having to significantly rewrite their code, potentially saving big on software development costs. Not only can many forms of OSS be migrated to more powerful hardware, packages like Linux have also been optimized to balance a server’s workload among a large number of machines working in tandem. Brokerage firm E*TRADE claims that usage spikes following 2008 U.S. Federal Reserve moves flooded the firm’s systems, creating the highest utilization levels in five years. But E*TRADE credits its scalable open source systems for maintaining performance while competitors’ systems struggled.R. King, “Cost-Conscious Companies Turn to Open-Source Software,” BusinessWeek, December 1, 2008.

Agility and Time to Market—Vendors who use OSS as part of product offerings may be able to skip whole segments of the software development process, allowing new products to reach the market faster than if the entire software system had to be developed from scratch, in-house. Motorola has claimed that customizing products built on OSS has helped speed time-to-market for the firm’s mobile phones, while the team behind the Zimbra e-mail and calendar effort built their first product in just a few months by using some forty blocks of free code.R. Guth, “Virtual Piecework: Trolling the Web for Free Labor, Software Upstarts Are a New Force,” Wall Street Journal, November 13, 2006.

10.4 Examples of Open Source Software

Just about every type of commercial product has an open source equivalent. SourceForge.net lists over two hundred and thirty thousand such products!See http://sourceforge.net. Many of these products come with the installation tools, support utilities, and full documentation that make them difficult to distinguish from traditional commercial efforts.D. Woods, “The Commercial Bear Hug of Open Source,” Forbes, August 18, 2008. In addition to the LAMP products, some major examples include the following:

• Firefox—a Web browser that competes with Internet Explorer
• OpenOffice—a competitor to Microsoft Office
• Gimp—a graphic tool with features found in Photoshop
• Alfresco—collaboration software that competes with Microsoft Sharepoint and EMC’s Documentum
• Marketcetera—an enterprise trading platform for hedge fund managers that competes with FlexTrade and Portware
• Zimbra—open source e-mail software that competes with Outlook server
• MySQL, Ingres, and EnterpriseDB—open source database software packages that each go head-to-head with commercial products from Oracle, Microsoft, Sybase, and IBM
• SugarCRM—customer relationship management software that competes with Salesforce.com and Siebel
• Asterix—an open source implementation for running a PBX corporate telephony system that competes with offerings from Nortel and Cisco, among others
• Free BSD and Sun’s OpenSolaris—open source versions of the Unix operating system

10.5 Why Give It Away? The Business of Open Source

Open source is a sixty-billion-dollar industry,M. Asay, “Open Source Is a $60 Billion Industry,” CNET, May 15, 2008. but it has a disproportionate impact on the trillion-dollar IT market. By lowering the cost of computing, open source efforts make more computing options accessible to smaller firms. More reliable, secure computing also lowers costs for all users. OSS also diverts funds that firms would otherwise spend on fixed costs, like operating systems and databases, so that these funds can be spent on innovation or other more competitive initiatives. Think about Google, a firm that some estimate has over 1.4 million servers. Imagine the costs if it had to license software for each of those boxes!

Commercial interest in OSS has sparked an acquisition binge. Red Hat bought open source application server firm JBoss for $350 million. Novell snapped up SUSE Linux for $210 million. And Sun plunked down over $1 billion for open source database provider MySQL.A. Greenberg, “Sun Snaps Up Database Firm, MySQL,” Forbes, January 16, 2008. And with Oracle’s acquisition of Sun, one of the world’s largest commercial software firms has zeroed in on one of the deepest portfolios of open source products.

But how do vendors make money on open source? One way is by selling support and consulting services. While not exactly Microsoft money, Red Hat, the largest purely OSS firm, reported half a billion dollars in revenue in 2008. The firm had two and a half million paid subscriptions offering access to software updates and support services.A. Greenberg, “Sun Snaps Up Database Firm, MySQL,” Forbes, January 16, 2008. Oracle, a firm that sells commercial ERP and database products, provides Linux for free, selling high-margin Linux support contracts for as much as five hundred thousand dollars.J. Fortt, “Why Larry Loves Linux (and He’s Not Alone),” Fortune, December 19, 2007. The added benefit for Oracle? Weaning customers away from Microsoft—a firm that sells many products that compete head-to-head with Oracle’s offerings. Service also represents the most important part of IBM’s business. The firm now makes more from services than from selling hardware and software.J. Robertson, “IBM Sees Better-Than-Expected 2009 Profit, Earns US$4.4 Billion in Q4,” Associated Press, January 20, 2009, http://humantimes.com/finance/business/sanfrancis/54853. And every dollar saved on buying someone else’s software product means more money IBM customers can spend on IBM computers and services. Sun Microsystems was a leader in OSS, even before the Oracle acquisition bid. The firm has used OSS to drive advanced hardware sales, but the firm also sells proprietary products that augment its open source efforts. These products include special optimization, configuration management, and performance tools that can tweak OSS code to work its best.C. Preimesberger, “Sun’s ‘Open’-Door Policy,” eWeek, April 21, 2008.

Here’s where we also can relate the industry’s evolution to what we’ve learned about standards competition in our earlier chapters. In the pre-Linux days, nearly every major hardware manufacturer made its own, incompatible version of the Unix operating system. These fractured, incompatible markets were each so small that they had difficulty attracting third-party vendors to write application software. Now, much to Microsoft’s dismay, all major hardware firms run Linux. That means there’s a large, unified market that attracts software developers who might otherwise write for Windows.

To keep standards unified, several Linux-supporting hardware and software firms also back the Linux Foundation, the nonprofit effort where Linus Torvalds serves as a fellow, helping to oversee Linux’s evolution. Sharing development expenses in OSS has been likened to going in on a pizza together. Everyone wants a pizza with the same ingredients. The pizza doesn’t make you smarter or better. So why not share the cost of a bigger pie instead of buying by the slice?S. Cohen, “Open Source: The Model Is Broken,” BusinessWeek, December 1, 2008. With OSS, hardware firms spend less money than they would in the brutal, head-to-head competition where each once offered a “me too” operating system that was incompatible with rivals but offered little differentiation. Hardware firms now find their technical talent can be deployed in other value-added services mentioned above: developing commercial software add-ons, offering consulting services, and enhancing hardware offerings.

10.6 Cloud Computing: Hype or Hope?

Oracle Chairman Larry Ellison, lamenting the buzzword-chasing character of the tech sector, once complained that the computer industry is more fashion-focused than even the women’s clothing business.D. Farber, “Oracle’s Ellison Nails Cloud Computing,” CNET, September 26, 2008, http://news.cnet.com/8301-13953_3-10052188-80.html?tag=mncol;txt. Ellison has a point: when a technology term becomes fashionable, the industry hype machine shifts into overdrive. The technology attracts press attention, customer interest, and vendor marketing teams scramble to label their products and services as part of that innovation. Recently, few tech trends have been more fashionable than cloud computing.

Like Web 2.0, trying to nail down an exact definition for cloud computing is tough. In fact, it’s been quite a spectacle watching industry execs struggle to clarify the concept. HP’s Chief Strategy Office “politely refused” when asked by BusinessWeek to define the term cloud computing.S. Hamm, “Cloud Computing: Eyes on the Skies,” BusinessWeek, April 24, 2008. Richard Stallman, founder of the Free Software Foundation said about cloud computing, “It’s worse than stupidity. It’s a marketing hype campaign.”L. McKay, “30,000-Foot Views of the Cloud,” Customer Relationship Management, January 2009. And Larry Ellison, always ready with a sound bite, offered up this priceless quip, “Maybe I’m an idiot, but I have no idea what anyone is talking about. What is it? It’s complete gibberish. It’s insane.”D. Lyons, “A Mostly Cloudy Computing Forecast,” Washington Post, November 4, 2008. Insane, maybe, but also big bucks. By year-end 2008, the various businesses that fall under the rubric of cloud computing had already accounted for an estimated thirty-six-billion-dollar market. That represents a whopping 13 percent of global software sales!M. Liedtke, “Cloud Computing: Pie in the Sky Concept or the Next Big Breakthrough on Tech Horizon?” Associated Press Newswires, December 21, 2008.

When folks talk about cloud computing they’re really talking about replacing computing resources—either an organization’s or an individual’s hardware or software—with services provided over the Internet. The name actually comes from the popular industry convention of drawing the Internet or other computer network as a big cloud.

Cloud computing encompasses a bunch of different efforts. We’ll concentrate on describing, providing examples, and analyzing the managerial implications of two separate categories of cloud computing: (1) software as a service (SaaS), where a firm subscribes to a third-party software-replacing service that is delivered online, and (2) models often referred to as utility computingA form of cloud computing where a firm develops its own software, and then runs it over the Internet on a service provider’s computers., platform as a service, or infrastructure as a service. Using these latter techniques, an organization develops its own systems, but runs them over the Internet on someone else’s hardware. A later section on virtualization will discuss how some organizations are developing their own private cloudsPools of computing resources that reside inside an organization and that can be served up for specific tasks as need arrives., pools of computing resources that reside inside an organization and that can be served up for specific tasks as need arrives.

The benefits and risks of SaaS and the utility computing-style efforts are very similar, but understanding the nuances of each effort can help you figure out if and when the cloud makes sense for your organization. The evolution of cloud computing also has huge implications across the industry: from the financial future of hardware and software firms, to cost structure and innovativeness of adopting organizations, to the skill sets likely to be most valued by employers.

10.7 The Software Cloud: Why Buy When You Can Rent?

If open source isn’t enough of a threat to firms that sell packaged software, a new generation of products, collectively known as SaaS, claims that you can now get the bulk of your computing done through your Web browser. Don’t install software—let someone else run it for you and deliver the results over the Internet.

Software as a service (SaaS) refers to software that is made available by a third party online. You might also see the terms ASP (application service provider) or HSV (hosted software vendor) used to identify this type of offering. SaaS is potentially a very big deal. Firms using SaaS products can dramatically lower several costs associated with the care and feeding of their information systems, including software licenses, server hardware, system maintenance, and IT staff. Most SaaS firms earn money via a usage-based pricing model akin to a monthly subscription. Others offer free services that are supported by advertising, while others promote the sale of upgraded or premium versions for additional fees.

Make no mistake, SaaS is yet another direct assault on traditional software firms. The most iconic SaaS firm is Salesforce.com, an enterprise customer relationship management (CRM) provider. This “un-software” company even sports a logo featuring the word “software” crossed out, Ghostbusters-style.J. Hempel, “Salesforce Hits Its Stride,” Fortune, March 2, 2009.

Other enterprise-focused SaaS firms compete directly with the biggest names in software. Some of these upstarts are even backed by leading enterprise software executives. Examples include NetSuite (funded in part by Oracle’s Larry Ellison—the guy’s all over this chapter), which offers a comprehensive SaaS ERP suite; and Workday (launched by founders of Peoplesoft), which has SaaS offerings for managing human resources. Several traditional software firms have countered start-ups by offering SaaS efforts of their own. IBM offers a SaaS version of its Cognos business intelligence products, Oracle offers CRM On Demand, and SAP’s Business ByDesign includes a full suite of enterprise SaaS offerings. Even Microsoft has gone SaaS, with a variety of Web-based services that include CRM, Web meeting tools, collaboration, e-mail, and calendaring.

SaaS is also taking on desktop applications. Intuit has online versions of its QuickBooks, TurboTax, and Quicken finance software. Adobe has an online version of Photoshop. Google and Zoho offer office suites that compete with desktop alternatives, prompting Microsoft’s own introduction of an online version of Office. And if you store photos on Flickr or Picassa instead of your PC’s hard drive, then you’re using SaaS, too.

10.8 SaaS: Not without Risks

Like any technology, we also recognize there is rarely a silver bullet that solves all problems. A successful manager is able to see through industry hype and weigh the benefits of a technology against its weaknesses and limitations. And there are still several major concerns surrounding SaaS.

The largest concerns involve the tremendous dependence a firm develops with its SaaS vendor. Having all of your eggs in one basket can leave a firm particularly vulnerable. If a traditional software company goes out of business, in most cases its customers can still go on using its products. But if your SaaS vendor goes under, you’re hosed. They’ve got all your data, and even if firms could get their data out, most organizations don’t have the hardware, software, staff, or expertise to quickly absorb an abandoned function.

Beware with whom you partner. Any hot technology is likely to attract a lot of start-ups, and most of these start-ups are unlikely to survive. In just a single year, the leading trade association found the number of SaaS vendors dropped from seven hundred members to four hundred fifty.M. Drummond, “The End of Software as We Know It,” Fortune, November 19, 2001. One of the early efforts to collapse was Pandesic, a joint venture between SAP and Intel—two large firms that might have otherwise instilled confidence among prospective customers. In another example, Danish SaaS firm “IT Factory” was declared “Denmark’s Best IT Company 2008” by Computerworld, only to follow the award one week later with a bankruptcy declaration.R. Wauters, “The Extraordinary Rise and Fall of Denmark’s IT Factory,” TechCrunch, December 2, 2008. Indeed, despite the benefits, the costs of operating as a SaaS vendor can be daunting. NetSuite’s founder claimed it “takes ten years and $100 million to do right”Sarah Lacy, “On-Demand Computing: A Brutal Slog,” BusinessWeek, July 18, 2008.—maybe that’s why the firm still wasn’t profitable, even a year and a half after going public.

Firms that buy and install packaged software usually have the option of sticking with the old stuff as long as it works, but organizations adopting SaaS may find they are forced into adopting new versions. This fact is important because any radical changes in a SaaS system’s user interface or system functionality might result in unforeseen training costs, or increase the chance that a user might make an error.

Keep in mind that SaaS systems are also reliant on a network connection. If a firm’s link to the Internet goes down, its link to its SaaS vendor is also severed. Relying on an Internet connection also means that data is transferred to and from a SaaS firm at Internet speeds, rather the potentially higher speeds of a firm’s internal network. Solutions to many of these issues are evolving as Internet speeds become faster and Internet service providers become more reliable. There are also several programs that allow for offline use of data that is typically stored in SaaS systems, including Google Gears and Adobe AIR. With these products a user can download a subset of data to be offline (say on a plane flight or other inaccessible location), and then sync the data when the connection is restored. Ultimately, though, SaaS users have a much higher level of dependence on their Internet connections.

And although a SaaS firm may have more security expertise than your organization, that doesn’t mean that security issues can be ignored. Any time a firm allows employees to access a corporation’s systems and data assets from a remote location, a firm is potentially vulnerable to abuse and infiltration. Some firms may simply be unacceptably uncomfortable with critical data assets existing outside their own network. There may also be contractual or legal issues preventing data from being housed remotely, especially if a SaaS vendor’s systems are in another country operating under different laws and regulations. “We’re very bound by regulators in terms of client data and country-of-origin issues, so it’s very difficult to use the cloud,” says Rupert Brown, a chief architect at Merrill Lynch.G. Gruman, “Early Experiments in Cloud Computing,” InfoWorld, April 7, 2008.

SaaS systems are often accused of being less flexible than their installed software counterparts—mostly due to the more robust configuration and programming options available in traditional software packages. It is true that many SaaS vendors have improved system customization options and integration with standard software packages. And at times a lack of complexity can be a blessing—fewer choices can mean less training, faster start-up time, and lower costs associated with system use. But firms with unique needs may find SaaS restrictive.

SaaS offerings usually work well when the bulk of computing happens at the server end of a distributed system because the kind of user interface you can create in a browser isn’t as sophisticated as what you can do with a separate, custom-developed desktop program. A comparison of the first few iterations of the Web-based Google office suite, which offers word processing, presentation software, and a spreadsheet, reveals a much more limited feature set than Microsoft’s Office desktop software. The bonus, of course, is that an online office suite is accessible anywhere and makes sharing documents a snap. Again, an understanding of trade-offs is key.

Here’s another challenge for a firm and its IT staff: SaaS means a greater consumerization of technology. Employees, at their own initiative, can go to Socialtext or Google Sites and set up a wiki, WordPress to start blogging, or subscribe to a SaaS offering like Salesforce.com, all without corporate oversight and approval. This work can result in employees operating outside established firm guidelines and procedures, potentially introducing operational inconsistencies or even legal and security concerns.

The consumerization of corporate technology isn’t all bad. Employee creativity can blossom with increased access to new technologies, costs might be lower than home grown solutions, and staff could introduce the firm to new tools that might not otherwise be on the radar of the firm’s IS Department. But all this creates an environment that requires a level of engagement between a firm’s technical staff and the groups that it serves that is deeper than that employed by any prior generation of technology workers. Those working in an organization’s information systems group must be sure to conduct regular meetings with representative groups of employees across the firm to understand their pain points and assess their changing technology needs. Non-IT managers should regularly reach out to IT to ensure that their needs are on the tech staff’s agenda. Organizations with internal IT-staff R&D functions that scan new technologies and critically examine their relevance and potential impact on the firm can help guide an organization through the promise and peril of new technologies. Now more than ever, IT managers must be deeply knowledgeable about business areas, broadly aware of new technologies, and able to bridge the tech and business worlds. Similarly, any manager looking to advance his or her organization has to regularly consider the impact of new technologies.

10.9 The Hardware Cloud: Utility Computing and Its Cousins

While SaaS provides the software and hardware to replace an internal information system, sometimes a firm develops its own custom software but wants to pay someone else to run it for them. That’s where hardware clouds, utility computing, and related technologies come in. In this model, a firm replaces computing hardware that it might otherwise run on-site with a service provided by a third party online. While the term utility computing was fashionable a few years back (and old timers claim it shares a lineage with terms like hosted computing or even time sharing), now most in the industry have begun referring to this as an aspect of cloud computing, often referred to as hardware cloudsA cloud computing model in which a service provider makes computing resources such as hardware and storage, along with infrastructure management, available to a customer on an as-needed basis. The provider typically charges for specific resource usage rather than a flat rate. In the past, similar efforts have been described as utility computing, hosting, or even time sharing.. Computing hardware used in this scenario exists “in the cloud,” meaning somewhere on the Internet. The costs of systems operated in this manner look more like a utility bill—you only pay for the amount of processing, storage, and telecommunications used. Tech research firm Gartner has estimated that 80 percent of corporate tech spending goes toward data center maintenance.J. Rayport, “Cloud Computing Is No Pipe Dream,” BusinessWeek, December 9, 2008. Hardware-focused cloud computing provides a way for firms to chip away at these costs.

Major players are spending billions building out huge data centers to take all kinds of computing out of the corporate data center and place it in the cloud. Efforts include Sun’s Network.com grid, IBM’s Cloud Labs, Amazon’s EC2 (Elastic Computing Cloud), Google’s App Engine, Microsoft’s Azure, and Salesforce.com’s Force.com. While cloud vendors typically host your software on their systems, many of these vendors also offer additional tools to help in creating and hosting apps in the cloud. Salesforce.com offers Force.com, which includes not only a hardware cloud but also several cloud-supporting tools, including a programming environment (IDE) to write applications specifically tailored for Web-based delivery. Google’s App Engine offers developers a database product called Big Table, while Amazon offers one called Amazon DB. Traditional software firms like Oracle are also making their products available to developers through various cloud initiatives.

Still other cloud computing efforts focus on providing a virtual replacement for operational hardware like storage and backup solutions. These include the cloud-based backup efforts like EMC’s Mozy, and corporate storage services like Amazon’s Simple Storage Solution (S3). Even efforts like Apple’s MobileMe and Microsoft’s Live Mesh that sync user data across devices (phone, multiple desktops) are considered part of the cloud craze. The common theme in all of this is leveraging computing delivered over the Internet to satisfy the computing needs of both users and organizations.

10.10 Clouds and Tech Industry Impact

Although still a relatively recent phenomenon, cloud computing’s impact across industries is already proving to be broad and significant.

Cloud computing is affecting the competitive dynamics of the hardware, software, and consulting industries. In the past, firms seeking to increase computing capacity invested heavily in expensive, high margin server hardware, creating a huge market for computer manufacturers. But now hardware firms find these markets may be threatened by the cloud. The trend shifting from hardware to services is evident in IBM’s quarterly numbers. The firm recently reported its overall earnings were up 12 percent, even though hardware sales were off by 20 percent.J. Fortt, “Goodbye, PC (and Mac). Hello, Services,” Fortune, February 4, 2009. What made up the difference? The growth of Big Blue’s services business. IBM is particularly well positioned to take advantage of the shift to services because it employs more technology consultants than any other firm in the world, while most of its competitors are forced to partner to offer something comparable. Consulting firm Capgemini’s partnership to offer cloud services through Amazon is one such example.

The shift to cloud computing also alters the margin structure for many in the computing industry. While Moore’s Law has made servers cheap, deploying SaaS and operating a commercial cloud is still very expensive—much more so than simply making additional copies of conventional, packaged software. Microsoft surprised Wall Street when it announced it would need to pour at least $2 billion more than analysts expected into the year’s server farmA massive network of computer servers running software to coordinate their collective use. Server farms provide the infrastructure backbone to SaaS and hardware cloud efforts, as well as many large-scale Internet services. capital spending. The firm’s stock—among the world’s most widely held—sank 11 percent in a day.S. Mehta, “Behold the Server Farm,” Fortune, July 28, 2006. As a result, many portfolio managers started paying closer attention to the business implications of the cloud.

Cloud computing can accelerate innovation and therefore changes the desired skills mix and job outlook for IS workers. If cloud computing customers spend less on expensive infrastructure investments, they potentially have more money to reinvest in strategic efforts and innovation. IT careers may change, too. Demand for nonstrategic skills like hardware operations and maintenance are likely to decrease. Organizations will need more business-focused technologists who intimately understand a firm’s competitive environment, and can create systems that add value and differentiate the firm from its competition.J. Fortt, “Tech Execs Get Sexy,” Fortune, February 12, 2009. While these tech jobs require more business training, they’re also likely to be more durable and less likely to be outsourced to a third party with a limited understanding of the firm.

By lowering the cost to access powerful systems and software, barriers to entry also decrease. Firms need to think about the strategic advantages they can create, even as technology is easily duplicated. This trend means the potential for more new entrants across industries, and since start-ups can do more with less, it’s also influencing entrepreneurship and venture capital. The CTO of SlideShare, a start-up that launched using Amazon’s S3 storage cloud, offers a presentation on his firm’s site labeled “Using S3 to Avoid VC.” Similarly, the CEO of online payments start-up Zuora claims to have saved between half a million and $1 million by using cloud computing: “We have no servers, we run the entire business in the cloud.”E. Ackerman, “Forecast for Computing: Cloudy,” San Jose Mercury News, December 23, 2008. And the sophistication of these tools lowers development time. Enterprise firm Apttus claims it was able to perform the equivalent of six months of development in a couple of weekends by using cloud services. The firm scored its first million-dollar deal in three months, and was break-even in nine months, a ramp-up time that would have been unheard of, had they needed to plan, purchase, and deploy their own data center, and create from scratch the Web services that were provided by its cloud vendor.J. Rayport, “Cloud Computing Is No Pipe Dream,” BusinessWeek, December 9, 2008.

10.11 Virtualization: Software That Makes One Computer Act Like Many

The reduced costs and increased power of commodity hardware are not the only contributors to the explosion of cloud computing. The availability of increasingly sophisticated software tools has also had an impact. Perhaps the most important software tool in the cloud computing toolbox is virtualizationA type of software that allows a single computer (or cluster of connected computers) to function as if it were several different computers, each running its own operating system and software. Virtualization software underpins most cloud computing efforts, and can make computing more efficient, cost-effective, and scalable.. Think of virtualization as being a kind of operating system for operating systems. A server running virtualization software can create smaller compartments in memory that each behave as a separate computer with its own operating system and resources. The most sophisticated of these tools also allow firms to combine servers into a huge pool of computing resources that can be allocated as needed.D. Lyons, “A Mostly Cloudy Computing Forecast,” Washington Post, November 4, 2008.

Virtualization can generate huge savings. Some studies have shown that on average, conventional data centers run at 15 percent or less of their maximum capacity. Data centers using virtualization software have increased utilization to 80 percent or more.R. Katz, “Tech Titans Building Boom,” IEEE Spectrum 46, no. 2 (February 1, 2009): 40–43. This increased efficiency means cost savings in hardware, staff, and real estate. Plus it reduces a firm’s IT-based energy consumption, cutting costs, lowering its carbon footprint, and boosting “green cred.”K. Castro, “The Virtues of Virtualization,” BusinessWeek, December 3, 2007. Using virtualization, firms can buy and maintain fewer servers, each running at a greater capacity. It can also power down servers until demand increases require them to come online.

While virtualization is a key software building block that makes public cloud computing happen, it can also be used in-house to reduce an organization’s hardware needs, and even to create a firm’s own private cloud of scalable assets. Bechtel, BT, Merrill Lynch, and Morgan Stanley are among the firms with large private clouds enabled by virtualization.J. Brodkin, “Private Clouds Bring IT Mgmt. Challenges,” NetworkWorld, December 15, 2008. Another kind of virtualization, virtual desktopsWhen a firm runs an instance of a PC’s software on another machine and simply delivers the image of what’s executing to the remote device. Using virtualization, a single server can run dozens of PCs, simplifying backup, upgrade, security, and administration. allow a server to run what amounts to a copy of a PC—OS, applications, and all—and simply deliver an image of what’s executing to a PC or other connected device. This allows firms to scale, back up, secure, and upgrade systems far more easily than if they had to maintain each individual PC. One game start-up hopes to remove the high-powered game console hardware attached to your television and instead put the console in the cloud, delivering games to your TV as they execute remotely on superfast server hardware. Virtualization can even live on your desktop. Anyone who’s ever run Windows in a window on Mac OS X is using virtualization software; these tools inhabit a chunk of your Mac’s memory for running Windows and actually fool this foreign OS into thinking that it’s on a PC.

Interest in virtualization has exploded in recent years. VMware, the virtualization software division of storage firm EMC, was the biggest IPO of 2007. But its niche is getting crowded. Microsoft has entered the market, building virtualization into its server offerings. Dell bought a virtualization software firm for $1.54 billion. And there’s even an open source virtualization product called Xen.K. Castro, “The Virtues of Virtualization,” BusinessWeek, December 3, 2007.

10.12 Make, Buy, or Rent

So now you realize managers have a whole host of options when seeking to fulfill the software needs of their firms. An organization can purchase packaged software from a vendor, use open source offerings, leverage SaaS or other type of cloud computing, outsource development or other IT functions to another firm either domestically or abroad, or a firm can develop all or part of the effort themselves. When presented with all of these options, making decisions about technologies and systems can seem pretty daunting.

First, realize that that for most firms, technology decisions are not binary options for the whole organization in all situations. Few businesses will opt for an IT configuration that is 100 percent in-house, packaged, or SaaS. Being aware of the parameters to consider can help a firm make better, more informed decisions. It’s also important to keep in mind that these decisions need to be continuously reevaluated as markets and business needs change. What follows is a summary of some of the key variables to consider.

Competitive Advantage—Do we rely on unique processes, procedures, or technologies that create vital, differentiating competitive advantage? If so, then these functions aren’t a good candidate to outsource or replace with a package software offering. Amazon.com had originally used recommendation software provided by a third party, and Netflix and Dell both considered third-party software to manage inventory fulfillment. But in all three cases, these firms felt that mastery of these functions was too critical to competitive advantage, so each firm developed proprietary systems unique to the circumstances of each firm.

Security—Are there unacceptable risks associated with using the packaged software, OSS, cloud solution, or an outsourcing vendor? Are we convinced that the prospective solution is sufficiently secure and reliable? Can we trust the prospective vendor with our code, our data, our procedures and our way of doing business? Are there noncompete provisions for vendor staff that may be privy to our secrets? For off-site work, are there sufficient policies in place for on-site auditing? If the answers to any of these questions is no, outsourcing might not be a viable option.

Legal and Compliance—Is our firm prohibited outright from using technologies? Are there specific legal and compliance requirements related to deploying our products or services? Even a technology as innocuous as instant messaging may need to be deployed in such a way that it complies with laws requiring firms to record and reproduce the electronic equivalent of a paper trail. For example, SEC Rule 17a-4 requires broker dealers to retain client communications for a minimum of three years. HIPAA laws governing health care providers state that electronic communications must also be captured and stored.D. Shapiro, “Instant Messaging and Compliance Issues: What You Need to Know,” SearchCIO, May 17, 2004. While tech has gained a seat in the board room, legal also deserves a seat in systems planning meetings.

Skill, Expertise, and Available Labor—Can we build it? The firm may have skilled technologists, but they may not be sufficiently experienced with a new technology. Even if they are skilled, managers much consider the costs of allocating staff away from existing projects for this effort.

Cost—Is this a cost-effective choice for our firm? A host of factors must be considered when evaluating the cost of an IT decision. The costs to build, host, maintain, and support an ongoing effort involve labor (software development, quality assurance, ongoing support, training, and maintenance), consulting, security, operations, licensing, energy, and real estate. Any analysis of costs should consider not only the aggregate spending required over the lifetime of the effort but also whether these factors might vary over time.

Time—Do we have time to build, test, and deploy the system?

Vendor Issues—Is the vendor reputable and in a sound financial position? Can the vendor guarantee the service levels and reliability we need? What provisions are in place in case the vendor fails or is acquired? Is the vendor certified via the Carnegie Mellon Software Institute or other standards organizations in a way that conveys quality, trust, and reliability?

The list above is a starter. It should also be clear that these metrics are sometimes quite tough to estimate. Welcome to the challenges of being a manager! At times an environment in flux can make an executive feel like he or she is working on a surfboard, constantly being buffeted about by unexpected currents and waves. Hopefully the issues outlined in this chapter will give you the surfing skills you need for a safe ride that avoids the organizational equivalent of a wipeout.